ECONOMICS HELP WORDING CHANGE
SARA121Assume Yn = 11,600, t=0.2, and G = 2,610. a) Conmpute the amount of taxes at natural real GDP.
Answer:
Tax (T) at natural level = 0.2*11600 = 2320
b) Explain why there is a natural employment deficit. Compute the amount of the natural employment deficit in terms of both billions of dollars and as a percent of natural real GDP.
Answer:
Since tax revenue at natural level is less than the government expenditure, we have natural employment deficit.
Amount of natural employment deficit = G-T = 2610-2320 = $290 billions
% of natural employment deficit = (290/11600)*100= 2.5%
c) Suppose that the goal of fiscal policymakers is to reduce the size of the natural employment deficit to 1 percent of natural real GDP. Compute what the size of the natural employment deficit must be in terms of billions of dollars in order for fiscal policymakers to achieve their goal.
Answer:
The size of natural employment deficit must be $116 billion (=11600*1%) for this is to be 1% of natural real GDP.
d) Given no change in the tax rate, compute by how much fiscal policymakers must cut government spending in order to accomplish their goal.
Answer:
The actual natural employment deficit (we have) = $290 billion and we want it to be $116 billion. So to accomplice this goal i.e. for budget deficit (G-T) to be $116 billion, the government expenditure must fall by $174 billion (=290-116).
e) Given no change in government spending, compute by how much fiscal policymakers must increase the tax rate in order to accomplish their goal.
Answer:
We know for natural employment deficit (G-T) to be 1% of natural real GDP, the deficit must fall by $174 billion (=290-116). So for deficit to fall by $174 billion, the total tax collection must increase by $174 billion i.e. the total tax collection should be $2494 billion (=2320+174).
Suppose tax rate be ‘t’
We want total tax at natural level to be equal to $2494 billion i.e.
11600*t = 2494, implies tax rate t = 0.215 or 21.5%
f) Given the objective of fiscal policymakers, explain what action monetary policymakers must take for the actions of fiscal policymakers to have no effect on real income.
Answer:
The monetary policymakers must follow expansionary monetary policy for the actions of fiscal policymakers to have no effect on real income. The policy followed by government here is contractionary in nature and hence the monetary policymakers would be required to conduct an expansionary monetary policy
g) Suppose that private saving increases as the interest rate increases. Given the fiscal-monetary policy mix describe in parts c-f, explain whether national saving increases by an amount that is larger than, equal to, or less than the decrease in the natrual employment deficit.
Answer:
When monetary policymakers would follow expansionary policy, the interest rates are likely to fall. With fall in interest rate, private saving would fall whereas with the government actions, public saving (T-G) would rise.
We know national saving is defined as the sum of private saving and public saving.
Since private saving is falling whereas public saving would rise, the national saving is likely to increase by an amount less than the decrease in the natural employment deficit.